Finance Players Bemoan Competitive Climate

LAS VEGAS—”It’s a frothy market,” declared Richard Katzenstein, a senior managing director at MMA Realty Capital Inc. in New York City. “When it gets this intense, there is clearly something wrong. The flood of capital is changing the market’s dynamics.” As an example, Katzenstein pointed to the rise of the CDO market and the ever-tightening spreads. “The benefit is to the borrowers and mortgage brokers; lenders are not getting paid for their risk.”Michael Mazzei, managing director of Barclays Capital in New York City, also noted that while the pace of deals is clearly up, competition and pricing has put a damper on profits. He spoke of one lender whose transaction volume has doubled, but its revenues were down 5%. “The market is deeper than ever before,” he stated. “There is too much liquidity and that could be a worry down the road.”Sam Kirschner, managing director of Hypo Real Estate Capital Corp. in New York City, agreed that the overabundance of liquidity “is putting tremendous pressure on the system. The market is somewhat overwhelmed because of the volume that is out there,” particularly in the CMBS market. “We are searching every day to see where we want to be playing because there is a lot of competition out there.”One thing that lenders can do to distinguish themselves in a crowded field is to establish solid relationships with borrowers, stated Tom Whitsell, a senior vice president with Fremont Investment and Loan in Santa Monica, CA. Working with a borrower and establishing a sense of continuity for the life of the loan is crucial. “We think that is important for a construction lender,” he said.Mazzei also blamed cap rate compression on the aggressive lending climate. “Over this past year, lenders have been driving cap rates and that’s an aberration.”Moderator Simon Ziff, president of Manhattan-based Ackman-Ziff Real Estate Group LLC, who at one point joked that the session sounded like a “pity party,” countered that cap rates have been on a steady rate of decline over the past few years and it is not a recent phenomenon.All of the panelists agreed that the financing community needs to address the fact that the climate has gotten too aggressive. “We are all trying to figure it out,” Katzenstein said. “The market will become more efficient but with some constraints on it.”